Kiddie Tax on Inheited IRA

Forum|Forum|1 year ago
January 21, 2025
2 replies
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I have a 13-year-old grandson (with no earned income) that has an inherited IRA from his grandmother. Understanding the 10-year withdrawal rule for Inherited IRA's, what is his best withdrawal strategy to minimize taxes on any withdrawals? It seems like he should start right now taking a withdrawal equal to the Kiddie Tax standard deduction (I believe it's around $1250 or so) then another $1250 or so which would be taxed at the child marginal rate, and do that each year as long as he can always staying below the withdrawal rate that would kick in the Kiddie Tax at his parent's marginal rate. Am I right or is there a better strategy?

Hal_Al

Level 15

Yes, your thinking is correct. Distributions from the IRA are considered unearned income. The threshold is $1300 for 2024.

Consider the child's current age and what their income might be 8,9 and 10 years from now. The distributions from an IRA are taxed as ordinary income, while capital growth outside an IRA is taxed at long term capital gains rates and capital growth in a 529 plan may not get taxed at all.

dmertz

Level 15

It generally makes sense to take distributions over 10 years in a way that minimizes the total amount of the distributions that goes to taxes. Depending on the age of the decedent at the time of death, RMDs might be required under the 10-year rule anyway.